(The writer is an attorney, president of the Howard
Jarvis Taxpayers Association, and a member of Gov.-elect Arnold Schwarzenegger’s transition team.)

What
does state deficit financing and a magic trick dating back to antiquity have in
common?

The
venerable trick requires intense scrutiny by the observer to follow the
progress of a pea as the performer moves it back and forth between three walnut
shells, while state financing requires equally intense attention to follow the
money as it is moved, borrowed and securitized (the practice of selling
anticipated revenue for cash now). Both the trick and state officials’ approach
to funding the budget are known as shell games.

The
California Constitution has a longstanding provision which enforces a balanced
budget. It does this by unambiguously prohibiting state debt beyond $300,000
without voter approval. That is why Californians are used to voting for
statewide school bonds, park bonds and water bonds. Most past administrations
have made a good-faith effort to conform to the spirit, if not the letter, of
the law.

However,
as the full impact of the reckless spending by Gov. Davis and his legislative
allies began to take shape as a $38 billion deficit for this fiscal year, the
administration decided to deal with the problem through sleight-of-hand.

The
problem, of course, is that it’s a lot easier to hide a pea than it is a
mountain. But give them credit for trying. Among the techniques they chose was
to borrow to fund existing spending obligations.

In
order to relieve itself of nearly $2 billion in pension obligations, the state
of California
filed a lawsuit against all taxpayers of the state, seeking validation from the
court for a $2 billion bond issuance that was never submitted to the voters for
approval. Actually, the “plaintiff” was a state agency, recently created by the
Legislature for the sole purpose of issuing bonds, called the Pension
Obligation Bond Committee.

The
state published notice of its lawsuit in five California
newspapers while officials crossed their fingers hoping no one would notice.
Too bad for them that one group was watching. Thus, the Howard Jarvis Taxpayers
Association appeared in court on behalf of the state’s taxpayers.

Needless
to say, state officials were disappointed to find taxpayers standing in the way
of their “budget-balancing” strategy. The state wanted to borrow money at up to
15 percent interest by issuing bonds to make this year’s annual payment to the
California Public Employees’ Retirement System (CalPERS) for state employee
retirement benefits. That would free up money from the special fund that is
earmarked for CalPERS, allowing the state to spend it on other things.

In
court, the state argued that the Constitution should be construed to allow an
exception for “obligations imposed by law,” that its obligation to CalPERS is
imposed by law, and that financing that obligation through bonds is just
substituting one debt for another.

Howard
Jarvis Taxpayers Association attorneys argued that the Constitution is clear
and cannot be read to allow the exception urged by the state, and, even if it
could, the state was not simply substituting one debt for another. Testimony at
trial proved that the state planned to use bond revenue not just to pay pension
obligations, but to pay approximately $80 million in bank and lawyer costs.
Moreover, the state was taking on a debt of hundreds of millions in future
interest payments.

At
the conclusion of the trial, Judge Thomas Cecil of the Sacramento County Superior
Court ruled in favor of the taxpayers.

This
victory is significant beyond the several billion dollars immediately at stake.
It sets a precedent for a second suit just filed by the Pacific Legal
Foundation on behalf of the Fullerton Association of Concerned Taxpayers to
head off another scheme to borrow nearly $10 billion without voter approval.
But most importantly, it sends a message to Sacramento
that the proper way to balance the budget is by living within the state’s
means, not shifting today’s expenses onto the backs of tomorrow’s taxpayers.

And
in case anyone forgets, tomorrow’s taxpayers are today’s children. So when the
tax-and-spend lobby complains about taxpayers unraveling their carefully
crafted budget deal, we have a ready answer: It’s for the children.